Should I invest in a cabinet company?

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Recently I was approach by a friend to invest in his cabinet making company. I don't know anything about the industry so before I say yes I wanted to see if I could get some input from other professionals in the business. He started being a dealer and in the last two years open the manufacturing side. He said there is a need for standard cabinet making since most companies offer custom. He explained that he would use the investment to buy material and get a larger warehouse so he could stock up and be able to offer the customer a three to five day turn around since he would already have the cabinets in stock. He also said at this time no company offers that which is way he can guarantee the investment will be a very successful one. My first question is how true is it that no other company in Georgia is doing it. Second is this a profitable business(we are talking in the six figures). Is there such thing as standard cabinets which are smart to always have on stock? Thanks

I would tend to think that there are ALOT of "stock" cabinet manufacturers compared to good custom. And also that the profit margin would be tighter due to the competition and relative ease of manufacturing "stock" (standard) sizes. IMO

The dealers on the West Coast that import from China have large inventory of stock in a variety of colors, species and door styles.

The Colors, finishes and styles vary a lot, spend a few hours in Home Depot shopping for a kitchen. Whether its stock or custom a lot of the choice is based on colors and finishes and features, if you limit your inventory you miss some sales, if you build that much inventory you have a lot of money tied up for instant sales in a channel that is used to "waiting".

I am sure there is some system of stock parts and ends that allow for a lot of "similar" items to be configured from inventory.

Is there any market research or sales trends that's makes this a good investment?

If I were you, I'd surely want to see his books and learn about his business plan long before I would consider investing six figures with him.

I'm fairly sure that anything he thinks he could build in his new shop and store in his warehouse either is or could be made within a day's driving distance of your location...probably for less money than he could build it for himself. We have just in time or next day delivery in almost everything a cabinet shop would need, so building inventory of supplies makes little sense. And unless there is a master plan that can reasonably turn over the inventory of finished goods in a warehouse several times over each year (or better yet, several times each month), your friend is setting up what could be a disaster.

If I were you, I'd find out exactly how much inventory he plans to build, how he plans to sell/distribute it and how often he plans to turn it over each year. 2-4 weeks lead time is not unusual to get even full custom made and delivered in the US, if you know where to look. Stock cabinets can take even less time. Shaving off a week or two might be worth a small premium in price to trade buyers like contractors, builders and designers, but for direct to homeowner buyers, a week or two doesn't make that much difference.

Regardless, your friend will never be able to beat pricing in the entire market without the economies of scale huge manufacturers have at their disposal. As far as profits go, I'd tread very carefully. Custom good in unique niches can be exceptionally profitable, but standard or lower grade cabinets are commodity priced. It's almost impossible to compete on price with the larger, more entrenched manufacturers. But you can do huge volume if you are positioned, marketed and priced right.

Good luck, and watch very, very closely if you decide to invest and expect to get a return on your investment and/or repaid.

One way to ruin a friendship for sure. "Guaranteed very successful investment" is another warning sign. Sounds like he is trying to compete with Ikea. Standard cabinets are everywhere! You can order them over the internet. If these aren't strong enough warning signs, have your banker or a small business accountant look at the books and working capital before investing.

If you were in my family i would tie you down to prevent you from jumping into this investment. He may be making it now but in 6 months he could be bankrupt. This is not a business that does well with financial projections.

If you want to do it then ask him for a copy of every business deposit for the last 3 years. I mean actual copies of checks he deposited. That will establish income. Then get his tax returns for the same years and have a business CPA evaluate what you have. Good luck.

Pat,
I like where your head's at ! very interesting graph. I'm in my 30's and looking for ways to keep a small custom shop going. We're busy now and have been for many years, but it does seem like the writing is on the wall. I don't see how anyone can compete with ikea, home depot, lowes. If you're making cabinets they have to be custom, ( in my humble opinion)
Question for Pat: What's the next demo to aim for? custom stairs for gen-X'ers? entertainment centers for millennials?

Since 2008 there have been a lot of cabinet shops go out of business, I don't know how many but I would guess well into double digits. That was a changing of the guard which had to occur because of so much money being made available in the housing sector while at the same time the people at the right age to buy houses was at an all time low. Meaning the people who are forming families are a small cohort of the population. Housing sales are at an all time low as a percentage of the population. See graph
But as the above graph shows that is going to change in a big way.

To me the best way to see what is happening is to look at who is making money. (BTW it ain't cabinetmakers)

Right now it seems to me it is the guys doing big commercial because of low interest rates and guys do high end residential because of low interest rates. But the guys doing high end residential (in
Calif) are complaining about not making any money. There is also kitchen remodels but I think that is going to start waning.

The BLC says the growth rate of cabinetmakers is going to be around 8% and for carpenters it is going to be around 24%.

The demand for houses will be there the question is in what form.

I think the growth areas are changing. I.E. they are not going to be Calif rather Utah and Colorado.

IIRC the market for entertainment units and similiar is the mid 30s so that might be good.

Custom cabinetmakers will always have to sell to people who are affluent.

Always be in very good communication with your customers to find out what they want and what interests them.

Join groups and find out who is making money and what kind of work they are doing.

Remember people buy stuff for their houses when they buy one so go where people are buying houses. This is a duh type statement but something to keep in mind.

There is probably a very good reason no one else is doing it! The huge inventory required would result in very low turn over of many items. Obsolescence would be a huge factor. He's looking for a way to fix people that can't plan ahead. Really expensive, are those people willing to pay a lot more?
Good advice by Hastings.

Look at the link from Alan F. I'm sad to say that we install this stuff on a somewhat regular basis. It's cheap and nasty, but there's a category of client that sees the price being 1/3 (yes -- 3 times cheaper!) and goes for it anyway. A normal stateside cabinet shop will have challenges fighting against this sort of product. If I was a betting man, I'd say that the imports will become dominant.

Now I am a woodworker and not a cabinet shop so I am just talking, but I would question the tools he is talking about using. The reason there are so many custom shops and not so many quick standard product shops is cost of tools. A custom shop is going to have a sliding table saw, joining, clamping and edge banding equipment. All of which are relatively inexpensive tools. A quick standard product shop is going to have CNC machines, and often auto loading, digital scanning, CNC painting/printing, and dedicated clamping/assembly machines. All of which are relatively expensive tools. I have not been to the IWF Atlanta show but if it is like the Vegas show it would be worth waiting until the end of August to decide if your friend is steering you in the right direction.
If your friend is talking about custom shop tools I would advise against the investment. You will need skilled employees and the cost of employees is going up very fast. If we go to a $15 minimum wage you can multiply current wages by three to see what the costs are likely to be. His premise for the investment is to be different then all the shops in the area and if he is talking about the same tools he will just be throwing his hat in the ring.
If he is talking about production machines then one of you needs to be skilled with a computer because the biggest cost is programming (not counting the real estate to house the venture). Even if neither of you do the programing someone will need a general understanding to deal with problems. If he is talking about CNC work, you can get your feet wet by renting time on someone else's machine. Here in Arizona many CNC shops are not running at full capacity and allow people like me to rent time on them so they can make the payment.

My personal opinion is that this is not a good idea- I don't think there are very many "Stock" cabinet companies that keep cabinets in stock. It just doesn't work that way. Better to develop a "Just in Time" system of production. But that's a whole other story :)

First and foremost I would like to thank all for you for taking the time to respond. Not knowing anything in regards to this industry and feeling lost each and everyone of your answers has really helped me out a lot and made things a whole lot more clear then I thought. I will speak to my friend as I now have some knowledge and can ask better questions in regards to his request. Again Thank you all so much. I will keep you all posted on how it goes. I have a feeling after the meeting I will have another question .

Most of the worlds industries have gone to some form of just in time manufacturing. They can't all be wrong! Greatly reduces inventory costs, manufacturing space, WIP, obsolete product....
What it requires is a modern system of manufacture. Much like Henry Ford developed.

#1 How much is he looking for? If he's got the profit he says he does, he should have no problem getting financing from a bank. If he doesn't get at least 2-300 grand, his idea won't work anyway, it'll die on the vine before it turns a profit.

#2- What software is he using? If he doesn't have something that links to a CNC machine already, he won't be doing any great CNC work for about 2 years until every machine is in place and someone has learned it and devised/revised the system.

If he's just designing, then he should have 2020 design or something similar

Fact: Generally this business/industry without the proper software/technology will not turn a profit.

#3-Ask him what kind of boat he really wants to buy with your money.

He sounds like the typical numbskull who has no idea why he's not making money and has decided that if he spends more of someone else's money on his non profitable operation he'll make it up in volume. It's very easy to buy things, the hard part is selling, harder still is getting your money.

You'll lose it in volume faster. The Best I'd do for this guy is build him a warehouse and rent it to him or he puts his current operations real estate (if he has any) in your name or you buy that from him.

Extreme risk, at the best. Without knowing more about the company, I say "NO".
Knowing what I know as a business owner and I consider our company successful, if you offered to invest in my own company, I would still tell you not to do it. While I might risk borrowed money from a loan institution (they know the risk), I couldn't make a projection to an individual and take their money. There is just too much craziness in the building industry these days.

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